The Production Process
The entire production process is a series of transformations in
which the primary factors of production (basic inputs)
Gradually become the final goods* and services** desired by
o *goods are physical: apples, sewing machines, shirts
o **services are intangible: haircuts, medical exam,
Which inputs are the primary factors of production?
What combinations of goods can be obtained from the
available quantities of primary factors?
Primary Factors of Production
The primary factors of production are services that
households provide as input into the productive process.
The Primary Factors are services (but we often omit the word
“services” from their names).
o Labor services: Productive work from human beings
o Capital Services: from productivity-increasing tools
o Land Services: from resources provided by nature
o (We think of labor, capital goods and land as being
owned and controlled by households.)
Availability of Primary Factors
The availability of labor is determined by the population of
working-age people and by the labor-force participation rate.
The availability of land is mainly determined by nature.
Capital formation (the creation of tools) is an economic
process that we should understand.
Capital Formation: The Rabbit Hunter
There was a cave woman who hunted rabbits for a living.
When she saw a rabbit she would dive and try to grab it.
Usually the rabbit escaped.
But when she caught the rabbit, she would kill it and it the
On the average, she